Merge with caution

Company mergers can resemble marriages in that both parties see a better future together rather than on their own

COMPANY mergers take place with increasing frequency and you need to ask some questions before you become involved in them.

Why are they taking place? And, who is supposed to get the benefits?

They take place because one party is concerned by lack of size. Both would share these concerns. The larger party would like to increase its size so that it becomes less attractive for a hostile takeover, hence the wish to absorb the smaller one.

The smaller one wishes to join with a larger one on acceptable terms so that it is not swallowed up and forgotten about in its industry.

Company mergers are similar to marriages in that both parties see a better future together rather than on their own. They wed with the best of intentions but things change and if either is unable to face the changes then that is when the bust up occurs.

There are risks in any such changes and these include change of premises and a change of leadership to name just a couple.

Change of premises can cause trouble and financial stress. The stronger party may well want to quit the existing premises. There are numerous possible reasons for this including wanting to be seen as Mr. Big, the leader.

That could leave the holder of such a lease in a costly and embarrassing position. Problems arise with a long term lease with no right of cancellation or right to transfer to a third party. The premises have to be occupied.

If your business is taken over or merged it is a basic requirement that you are not left with the financial liability for the lease. It can and does happen where the fine print is not carefully read and understood. You will need to get a lawyer to inspect the paper and protect your interest.

If this does not happen you will be most upset mentally and financially if there is a knock at your door and you are presented with a demand for the balance of the rent possible under your lease. You can be sure the demand will also include legal costs for the property owner and whopping penalties if payment is not immediately forthcoming.

Legal necessities

I trust you will understand and approve of having all documentation approved by your lawyer before putting pen to paper. You may want to sign a draft agreement and if so you need to add that the finality depends on the approval of your legal advisers.

Another major risk for you if you are approached for merging into a larger company is how confidential is your information if the merger does not proceed. Some people with dubious principles may be keen on a merger and insist that you put all your detailed information on the table.

After pouring through it and becoming aware of all your plans and secrets they advise they will not be able to proceed with the merger or takeover. They express great regret and return all or any papers to you. They no longer need them as they have full details of your business plans for the future.

At some later stage in the negotiations, the question of price should be determined. The buyer may not want to agree on a price without having all the details about your business. As noted above, they get all your information and then walk away.

The way to stop this is to keep the critical details from an inquirer until you are satisfied the inquiry is genuine and will lead to a deal. You also need to have agreement as to the likely price when the deal goes ahead.

The simple way of determining this is to hold the key final details until you have been paid a non-refundable deposit. This could be anything from say 10 per cent or up to 25 per cent and, without the deposit, the final details are not disclosed

Such an insistence puts the pressure on a buyer. If they are genuine, they will pay up. If however, they are on a fishing trip, they will break off negotiations and move on. You will be able to learn from the experience and will still have the critical information in your sole possession.

I trust that this outline of the risks involved with a merger will help protect you if an apparent buyer hopes to take you to the cleaners. It is a situation which calls for money up front to show the honest intentions of a would-be buyer wanting to merge with you and absorb your business.

You have been warned of the risks involved so it is over to you to get experienced legal advice before agreeing to a deal.